Earnings Surprise trading

[RunTrade]

Does anyone focus heavily on anticipating and trading on earnings announcements?

What would you think about analyzing fundamentals to determine the probability of beating the estimates, volitility of surprises, and using some options for leverage. Would this be a sound strategy? I have found that companies which are currently fundamentally unsustainable have EPS estimates that are somewhat on the aggressive side and that such companies can usually do a good job outperforming these estimates.

My only difficultly in this approach is determining the proper entry point. In theory, the price should slowing trend towards the earnings report of either "good news" or "bad news" (sometimes no news), but that is only a generalization and I dont have, or at least do not know of any model or formula that indicates the strengh of such a tendency on an individual stock basis. any help?

 

[RunTrade]

70 views and no help?

no one must like to trade on fundamentals on this site

 

[hoodooman]

It didn't work for me. Is that any help?

 

[TruthTeller]

Quote from RunTrade:

What would you think about analyzing fundamentals to determine the probability of beating the estimates, volitility of surprises, and using some options for leverage.

A lame idea. Just how are you going to go about analyzing fundamental data to peer into the future of an earnings report? Do you have sources of information that no other traders on the planet possess? And if by some mystical means you were able to come up with an earnings estimate, likely before it was even presented to the CEO, you have no way of knowing the street reaction. I've held many stocks through earnings that reported excellent numbers, but were trashed on guidance. And conversely, many reported soft numbers but strong guidance, and rallied the next day.

To compound your problem, a company that's going to report numbers that are significantly strong enough to move the market, will most often have already given guidance before reporting.

But...if you can come up in advance with a surprise number - and write the guidance we're going to hear - please PM me immediately. I have a million dollars for you to trade.

 

[RunTrade]

Quote from TruthTeller:

A lame idea. Just how are you going to go about analyzing fundamental data to peer into the future of an earnings report? Do you have sources of information that no other traders on the planet possess?

I believe professional analysts use fudamental data from financial reports that are available to the general public. lmao

Quote from TruthTeller:
I've held many stocks through earnings that reported excellent numbers, but were trashed on guidance. And conversely, many reported soft numbers but strong guidance, and rallied the next day.[/B]

could you give an example? somtimes "poor guidance" on good reports can be predicted...def. not always. but please look below...

Quote from TruthTeller:
To compound your problem, a company that's going to report numbers that are significantly strong enough to move the market, will most often have already given guidance before reporting.[/B]

correct. but that doesnt even come close to canceling out the effect of the earnings report. (otherwise there would be no such thing as an earnings surprise). Sometimes a company will report throughout the quarter good progress/sales/whatever... the analysts will then often put out new target numbers, but in these cases it is even harder for this new target number to be hit.

Quote from TruthTeller:
But...if you can come up in advance with a surprise number - and write the guidance we're going to hear - please PM me immediately.[/B]

not sure what you mean by a surprise number? I can give you the EPS i expect. From that number I can tell you which way the stock price should move, if at all...but I can't say how far or how long.

Quote from TruthTeller:
I have a million dollars for you to trade.[/B]

If you have a million dollars...I would like to hope that you have some knowledge of fundamental analysis and that its not some "sources of information that no other traders on the planet possess".


-R.T.

 

[RunTrade]

Quote from hoodooman:

It didn't work for me. Is that any help?

may i ask how you approached it and your strategy?

 

[TruthTeller]

Quote from RunTrade:


If you have a million dollars...I would like to hope that you have some knowledge of fundamental analysis and that its not some "sources of information that no other traders on the planet possess".

My trading system is based on technical levels of fundamentally strong stocks. I live by fundamental analysis, and have for years. And what I've been trying to tell you - if you would LISTEN - is that you can't consistently predict price movements in advance of earnings reports based on information that is readily available to anyone with half a brain and access to Yahoo finance. And at last count, that includes most of the planet.

(There are two traders who immediately come to mind who were in fact able to do that successfully. They enjoyed a paid vacation in federal prison for trading on inside information.)

You are free to place your bets and take your chances.

 

[RunTrade]

I would like to believe that I did LISTEN to your first post...it sounded like it was impossible to make accurate predictions, yet there are thousands of paid professionals who do so.

I still do not understand why you think it is a lame idea. Obviously its not supposed to be some miracle worker and yes you will lose some of the time. But I believe that through the proper use of analysis and risk management, you can be successful like any other trading style.

I think it is far from "placing your bets"

 

[JORGE]

Quote from RunTrade:



I still do not understand why you think it is a lame idea. Obviously its not supposed to be some miracle worker and yes you will lose some of the time. But I believe that through the proper use of analysis and risk management, you can be successful like any other trading style.

The problem with this strategy is that it is extremely difficult to manage your risk. You mentioned in your first post that you would use options, but the premium in options before an earnings announcement normally factors in the odds of a volatile post earnings move and it would take an extraordinary move to profit. You could be dead on with your analysis and still come away empty, even if the stock moves in line with you expectations.

If you truly believe you have an edge going into the earnings, take your position a couple of weeks in advance and then sell before the earnings as everyone else comes to the same realization you have.

 

[HotTip]

I looked at the idea some time ago, and did a comprehensive data analysis over almost a thousand ERs. My conclusion was that it was possible to extract a profit if you monitored the price action prior to the ER, because more often than not a stock that significantly trends in the day(s) prior to the ER will reverse immediately after the ER, regardless of the news, as all the traders attempted to capture a profit. Unfortunately I abandoned the idea because there were too many 25%+ hits. The extremely high volatility meant that I'd have to scale down my bets considerably, yielding an overall profit that was less than desirable. What I trade now is much less volatile and also much more consistently profitable.

I agree with Truthteller though. Just by analyzing the fundamentals it is impossible to predict how a stock will do post-ER, as all of the fundamentals (even whisper numbers) are already captured in the stock price. I likewise attempted to predict post-ER price movement based on guidance, whisper numbers, ratings, etc., and found no success. Price action was the key.